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So, in no particular order, here are my top tips for running your own small business:

• Make sure you have plenty of money. Cash flow is the life blood of your company. Unfortunately, I’ve seen far too many first timers make the mistake of spending their cash before they had it in their bank account. (One of my favorite books on finance for first timers: The McGraw-Hill 36-Hour Course In Finance for Non-Financial Managers)
• Remember who’s boss. When I first started running the business, the field staff was telling me how to run the business. They’d say, “I’m not working on weekends!” or “You need to pay me overtime for weekend work.” I was inexperienced and I let people tell me what to do — the tail was wagging the dog.
• ** Staff with care.** Hire for people skills, you can train the rest. You want people that aren’t just looking for a paycheck, they have to want to be there. Give me someone that can effectively talk to people, I’ll teach them how to build a patio.
• Don’t be afraid to fire people. It takes a lot to make a business run smoothly. In the first year or two, don’t be surprised to see 300%-400% employee turnover. By your third year, you’ll figure things out and turnover will drop to 10%. If someone isn’t working out, let them go — it’s better to be short-staffed than to give bad service.

That’s pretty much all there is to it. When in doubt, just remember that being successful is really about doing a few simple things right and learning from the mistakes you make along the way.

The economy is in shambles, real estate valuations are tanking and most “brick & mortar” business models depend on unpredictable things like weather and fuel prices — add all that up and you’ve got a recipe for tight margins and bankers that are unlikely to lend to you. No big deal though, keep reading to get my best advice for first time buyers — though not easy, it is possible to make a good deal on a business, even in today’s market.

KNOW THE LOCAL CONDITIONS

You don’t need me to tell you that the real estate market is — how should I put this — shitty. The same thing that happened in subprime home lending happened in the commercial property sector, the property values were (and, in some cases, still are) inflated. Take a brief look at BizBuySell and you’ll notice that a ton of businesses are for sale. As someone who has been checking the site regularly for months, I can tell you that the number of listings on there have steadily increased over the past few months.

You can spend $15 million to buy a chain of pizza shops in the DC Metro area or $400,000 for an equivalent business in rural southwestern Virginia. The key is to understand that virtually every sale is happening at a steep discount from the list price, just as in the housing market. There’s plenty of inventory and lots of time to shop around for the right fit. In one case, I called up a car wash listed for sale at $5 million — the current owner dropped the price to $1.7 million on the first phone call. (If you know of a better way to save $3.3 million in 15 minutes, I’d love to hear it.)

The best strategy for a first-time investor is to buy a business in a familiar geographic area and be wary. Have a realistic understanding of the business’ competitors, challenges and potential. If the seller’s (or your) business plan calls for substantial improvements or, more commonly, raising the current prices, make sure the business is still appropriate for the area. (e.g. Don’t buy a car wash 30 miles outside a big city, build the most luxurious customer waiting area and expect customers to come running.) Most importantly, make sure that your business plan makes sense even if you’re not getting as many customers as the current owner is.

One more thing: More isn’t always better. An attached retail store, gas station or anything else along those lines is just an added complexity that the first time buyer should avoid like the plague. You’ll probably pay higher property taxes, more insurance and have the headache of dealing with more than you can probably handle the first time around. (It’s common practice in gas stations and laundromats to have other businesses sub-leased inside the main property — if you encounter this, run the other way. A good example of this: laundromats that sub-lease space inside the building to a tailor.)

JUMP THE FINANCING HURDLE

First things first: there is no such thing as 100% financing in the commercial world — plan on putting in at least 20% down on most deals. Taking today’s credit markets into consideration, first time buyers should be ready for bankers to ask for up to 50% down payments on some deals. Yes, it sucks, but it does two things:

1. If your business plan turns out to be too aggressive (i.e., you’re not as successful as you anticipated), having the additional equity gives you a smaller debt service payment while you work out the issues.
2. Lenders are more likely to give you the loan because you’ve got more of a stake in the business.

Fight the urge to borrow more than you need, even if the lender wants to give it to you. (Yes, this happens more often than you would think.) Start conservative — you can always re-do the marketing materials or buy more advertising later. The key here is to simply get into the business first and get a handle on what you’re actually working with. You don’t want to put yourself in the position where you spend $25,000 on some huge improvement but you’re still underwater in terms of revenue.

Rule of thumb: Always, always, always keep the seller’s skin in the game by asking them to privately finance some portion of the deal. Of course you’ll want a lawyer or accountant to review the terms of the deal, but you’ll thank me later if you find out that the previous owner “massaged” some of the revenue or expense numbers. Believe me, this happens much more than you think. (A friend of mine bought a service company in the DC area a few months ago. Three months after taking over the business from the previous owner, she realized that the revenues were nowhere near what the previous owner had disclosed. Luckily, the previous owner had financed 20% of the deal — when my friend had her lawyer contact the previous owner to understand why the revenues weren’t adding up, the guy simply offered to “forget” about the 20% loan he had made to my friend.) Owner financing helps keep the seller’s skin in the game — don’t forget that.

FIND THE HIDDEN COSTS

The business plan is only a small part of the ownership equation. If you’ve never been in business, you need to educate yourself about the things that can and do go wrong. If brick and mortar businesses were really as simple as most people think, more people would be doing it. Keep your eyes wide open.

The most common hidden costs are dependent on the type of business, but here are some examples:

• Golf courses are heavily dependent on weather. Get a few consecutive rainy days, common in the Northeast, and you’ve got a cash flow problem.
• Car washes need some pricey maintenance every few years. If the previous owner “can’t find” the maintenance records, you should run away screaming.
• Laundromats suffer from vandalism more often than you would think. The previous owner should have invested in a video surveillance system or, alternatively, should provide you with a list of equipment that had to be repaired/replaced in the last 12 months.
• Lawn care businesses need fertilizers and other chemicals that are oil-based — you’re at the mercy of oil prices. Good luck to you.

From my own experience, I’ll tell you that the most stressful times you’ll face are going to be related to hidden costs. Spend the time up-front to discover the hidden costs of any business you’re looking to get into — you’ll never be prepared for 100% of them, but it’s your responsibility to discover anything that the previous owner might be hiding.

PUSH THOSE ADD-ONS

Most first time buyers buy a bar or some other business because they got caught up in the romance of it and forgot to pay attention to the fundamentals. Never forget that, as a private business, your business’ goal is to make money.

In addition to the heavy lifting that comes with managing any business — agonizing over profit-and-loss statements, meeting a payroll, and deciding how much to spend on improvements — understand that running a brick & mortar business is more than just about your primary product or service. I’d say that 99% of businesses out there have a secondary product or service that can contribute a huge amount of revenue to the top line — if you own a golf course, you should be pushing food and beverages. (After all, what kind of golfer says “Oh, I’ll just grab a beer at home once I finish off these 9 holes.”)

Most first time buyers don’t have a problem identifying the business’ secondary products and services — but they do underestimate the time and hassle involved with getting the liquor licenses or negotiating contracts with distributors.

DO YOUR RESEARCH. AND THEN SOME.

If you remember nothing else from this post, understand that you’ll never finish doing your research. The absolute best way to make a better deal is to know what you’re getting yourself into. Here’s how I do it:

1. Go to BizBuySell and do a search for the type of business you’re interested in.
2. Contact 10 of the brokers and sign their non-disclosures.
3. Read the sales documents and compare the business’ financials.
4. Pat yourself on the back — you just learned more than most people and you spent nothing.

Be patient, do this 3 times (yeah, you need to look at ~30 deals) and you’ll be in a great place to pick up a business of your own. Once you’ve looked at the financials of a few businesses, you’ll start to see some patterns emerge and you’ll avoid getting suckered into some shady deals.

Update: Here’s my next post on how to actually run a small business.

The Milgram Experiment

The Milgram experiment was a series of social psychology experiments which measured the willingness of study participants to obey an authority figure who instructed them to perform acts that conflicted with their personal conscience. In Milgram’s own words:

I set up a simple experiment at Yale University to test how much pain an ordinary citizen would inflict on another person simply because he was ordered to by an experimental scientist. Stark authority was pitted against the subjects’ [participants’] strongest moral imperatives against hurting others, and, with the subjects’ [participants’] ears ringing with the screams of the victims, authority won more often than not. The extreme willingness of adults to go to almost any lengths on the command of an authority constitutes the chief finding of the study and the fact most urgently demanding explanation.

The results: 65% of participants administered the final 450-volt shock to another person — simply because an authority figure told them to do it.

Milgram says it’s our deep-seated sense of duty to authority. We’re trained from childhood to respect authority, and the obedience that comes with it stays with us throughout our lives, even when we feel something may not be quite right.

Dress the part

Our deference to authority is driven mostly by perception. That’s why a lab coat, police officer’s uniform or $4,000 bespoke suit alone can facilitate influence over or control of others. We even act differently toward other people depending on our perception of their authority level, sometimes even adopting their mannerisms and speech patterns.

Everything else being equal, context matters more than actual content. In other words, if a person is perceived as an authority figure, what they say is taken at face value and accepted as fact more readily. It helps someone bypass otherwise common objections. Building authority is therefore crucial to building a business, especially if you are selling services or knowledge products.

Next time you’re heading into an important meeting or simply trying to make new friends, take a minute to look in the mirror — what are your clothes actually saying about you?

Even Hyundai’s doing it — in their most recent ad, they noted that the new Genesis sedan ($33K) has the same sound system as a Rolls-Royce Phantom ($300K+). “If you’d rather have money than a hood ornament,” goes the ad, the Genesis may “look even better than a Rolls-Royce.” *Nice. *

At the end of the day, the ‘I-buy-it-because-I-can” mentality is dead. No one wants to look like the idiot who bought something because it’s expensive anymore. **If you’re selling to this market, you should be focusing on practicality, value and durability. **

Focus on hitting singles and doubles. Home runs don’t happen every day or even every decade.

Everyone knows Tiger Woods is the greatest golfer ever and most people attribute that success to something vague and intangible, like talent or sheer luck. But, did you know that Tiger works out every day, runs for miles and wins less than 50% of the time? Did you also know that he started golfing when he was 3 years old?

Tiger learned to swing the club consistently — he had to learn to connect with the ball and make it go where he wanted before he could win any tournaments. These were his “singles and doubles.”

**The things your business does on a day-to-day basis are your singles and doubles. **Use metrics to incrementally improve them.

I don’t blame people for ignoring metrics — it’s only natural to push this stuff to the end of your task list when you’ve got a million other things to do. A few years ago,* I did the same thing*.

It’s easy to get overwhelmed by the numbers, but the key to successfully taking your business to the next level is understanding how to prioritize the metrics that directly impact your success. At the end of the day, you only need to build the metrics that enable you to grow your offering, whether it’s a product or service, by hitting a number of singles and doubles.

Two types of business metrics

1. Operational Metrics. These reflect the things that your business cares about on a day-to-day basis. Inventory, cash flow, net new customer counts, etc. You alone are the expert at your business, take a minute to write down the numbers that are important to you.
2. Investigative Metrics. These are the numbers that you’re curious about. Which product/service do most of my customers buy? Where do my customers typically come from? You get the idea.

Metrics: Where to start

When it comes to metrics within the context of the small business, the general rule of thumb is that you only measure what you intend to improve upon. So, ask yourself some of these questions:

1. What are your current goals for the business?
2. What assumptions are you making?
3. What key metrics will help you track the progress towards the business’ goals?

For most of you, the best place to start is by setting up your operational metrics. This gives you a handle on where your business is on a day-to-day basis and, more importantly, helps you start hitting singles and doubles.

Breaking News: No one can create the perfect plan to get ahead.

If I could tell you the specific steps you need to take in order to get ahead and promise that you could succeed 100% of the time, you’d love me. But, I can’t. The specific road map to successfully (and consistently) grow your business just doesn’t exist. You can’t predict the future; otherwise, psychics would be billionaires.

So what can you actually control?

Your odds.

Most people succeed because they hit “singles and doubles.” These people understand that this is the single best way to make your odds of success better — you can’t hit a home run without first learning how to hit the ball in the first place.

Rather than looking for the next idea that’s going to make them an overnight success, the best entrepreneurs spend their time improving the fundamentals of their business using metrics. By learning how to consistently hit these singles and doubles, these entrepreneurs set themselves up to knock a home run out of the park.

The bottom line

Don’t waste your time or money by searching for home runs. Use the right business metrics to focus your efforts on your business’ singles and doubles — this will inevitably improve your odds of knocking one out of the park.

Don’t waste time making things perfect — follow best practices and move on. As a rule of thumb, it’s better to do something, anything, rather than sitting around and waiting longer. Follow best practices, then move on.

Build momentum by accumulating small successes. That first thing you do – from start to finish – serves as a model for you to do subsequent things. From there, repetition breeds ease: **

Do one new thing, do millions more.

Warren Buffett understands the importance of a good reputation — and how difficult it is to overcome a poor past. When Buffett wants to add another company to Berkshire Hathaway’s portfolio, he’ll ignore those options with bad reputations even as he looks at companies with cash-flow problems and members of weak industries. Says Buffett,

When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact.

He has every confidence that he can deal with any other problem in a business, but even Warren Buffett doesn’t feel up to repairing a poor reputation.

Build An Amazing Reputation

We know that a poor reputation is not something we want. But how can we build a reputation that really helps our businesses (and our personal brands)?

Many companies build their reputation by ‘underpromising and overdelivering.’ They want to give the image that they’ve gone a step beyond for their clients while really just performing at their normal level. As far as reputations go, this sort of average performance isn’t bad: businesses that succeed in underpromising and overdelivering certainly won’t scare off prospective clients. But they also won’t have a great reputation.

To get a great reputation, your business needs to go beyond average. You need to promise great things and deliver. Go back to Warren Buffett for a moment: everyone wants stock in Berkshire Hathaway because of his reputation of making money for his investors. He got that reputation by demonstrating, time and again, that he could get the great returns he promised. You don’t have to get Buffett’s return to build a great reputation, but you do need his ability to follow through.

On one level, building a good reputation is easier than building your brand. You don’t need to print out fliers or distribute business cards to let people know about your abilities; your clients will do it for you. You do need to make sure that your clients have a few good things to contribute to your reputation, though. At the most basic level, your customer has to be satisfied. Your product must be problem-free or your service must be completed on time. But you should take customer satisfaction to the next level. Go beyond their expectations and provide a product with an extra bell or whistle.

As your business grows, your brand will change. Your logo may go for a redesign and your website may get an upgrade. But the reputation you have today will still be affecting your business. In ten years, your customers will still remember you — if you go beyond their expectations.

The problem with most small businesses these days is that they don’t actually know whether they’re actually successful or simply lucky to be surviving.

“But Paul,” you might say, “my store/website/lemonade-stand received 2,200 visitors last month and it generated 35 sales.” My response: “Great! So, was last month a successful one for you?” And then, I get nothing but a blank stare. (Seriously, I have a conversation like this at least once a week these days.)

Look, everyone knows that selling more stuff can usually mean that your business is doing just fine. But, the key is to define a clear, measurable goal.

“Sell more stuff” is not a goal. “Sell 30 widgets and 50 hubcaps every week” is much, much better.

As a rule of thumb, always start with your goal. You can’t create a good plan until you know your objective. So, be crystal clear on exactly what you intend to achieve. (Use this template to track your goals.)

Then, measure compulsively. Seriously, you’ve got no excuse — spreadsheets, Google Analytics or the 872,345 other tools out there will all do the job for you. Besides the usual operational stats, other useful metrics might be CPO (“Cost-Per-Order,” which includes advertising, fulfillment and expected returns, chargebacks, and bad debt), ad allowable (the maximum you can spend on an advertisement and expect breakeven), and projected lifetime value (LV) given return rates and reorder %.

In the end, just remember that you’ve got to start thinking about how to systematically build the business that you’ve started. Setting goals and measuring progress towards them is the smartest way to get there without wasting a ton of time and energy along the way.

Need some expert help to sort out the right goals or get some sort analytics package in place? Let me

Most companies spend some amount of time figuring out how to make a visitor buy something from their site. In some cases, they’ll even spend tons of money on some overpriced contractor to actually make this happen. When they actually launch the site, the sales process looks a little something like this:

Visitors somehow end up on the company website and, if you’re lucky, they’ll buy something. Yep, it’s pretty weak. But then again, it’s the first iteration of the site — hopefully you’ll learn something from the the data you’re collecting via Google Analytics or other free services. (If you haven’t already, check out 14 free tools to understand your visitors.)

Soon thereafter, you realize you can setup RSS feeds, newsletters and integrate your content with Facebook, LinkedIn, Twitter… you get the idea. The site naturally moves to its second evolution.

Getting better. You’re keeping visitors engaged and, as long as you’re providing them with valuable information, they’ll hopefully come back to the site later on and actually buy something from you. For most companies, this is probably as advanced as their sales processes are going to get.

Though, the few insanely smart businesses out there instantly recognize that there’s a huge gap in the sales loop and realize that they’re leaving a ton of money on the table. The key is to understand that when customers buy something from you, they’re voting with their wallets. They clearly like something about what you have to offer and, chances are, they’re likely to buy from you again. So, why not take advantage of it?

The point here is to keep your customers engaged in what you’re doing. They’re already loyal to you, you might as well take advantage of that and keep talking to them. The simplest way to do this is to make sure they’re subscribed to your newsletters, RSS feeds or whatever else you think is good. Better yet, segment your lists so that customers are on a totally separate list — this lets you send them different materials or even give them exclusive special offers that regular visitors never even see.

First things first: Clear off 15 minutes today, grab a pen & paper and start making flowcharts that show how you interact with your customers. Chances are, there’s at least one thing you could be doing better.

If you’re feeling especially lazy (or would rather get some expert help), let me know.

Buy or Bury the Competition.

If you’re cutting costs across your business and you’ve done a decent job of keeping your employees focused on the right things, you’re probably in a good position to take advantage of the one big benefit of the economic downturn: the opportunity to hurt or, better yet, destroy the competition.

Two tactics that might be useful as you start going after your competition:

1. Steal their customers. The competition is probably hurting for cash, but you’re probably in a better position to extend some decent credit lines to customers that you may never have been able to reach before.
2. Steal their employees. If you’re doing well, start talking about it. Your competition’s employees are probably getting concerned about their job security — use this to your advantage and get some great talent that you might not have ordinarily had access to.

Look, there’s no doubt that you’ve got to get on the defensive in times like this. Just don’t forget that there are some benefits to going on the offensive while everyone else is weak. In the words of Jack Welch,

There’s little downside to an overaggressive response to economic turmoil. The risk lies in wishful thinking and timidity.

Rather than focusing on your own survival, think about how you can take advantage of the fire sale.